Question

Parent purchased Subsidiary on January 1, 2019. The parent uses the equity method to account for its investment in its subsidiary. The excess of investment cost over book value was allocated as follows:

Equipment (20-year life) $400,000

Customer list (10-year life) 90,000

Patent (5-year life) 125,000

Goodwill 165,000

Total $780,000

Parent regularly sells merchandise to Subsidiary. In 2021, inter-company sales amounted to $60,100, with $18,000 of deferred profit remaining in ending inventory. Year-end inter-company receivables/payables amounted to $24,000.  

In 2022, inter-company sales amounted to $98,000 with $45,000 of deferred profit remaining in ending inventory. Year-end inter-company receivables/payables amounted to $35,000.   

Financial statements of Parent and Subsidiary for the year ended December 31, 2022 are presented below.

	Parent	Subsidiary
Sales revenue	$687,000	$750,000
Cost of goods sold	-425,000	-350,000
Gross profit	262,000	400,000
Operating expenses	-125,000	-36,700
Income (loss) from subsidiary	282,300	_________
Net Income	$419,300	$363,300
Retained Earnings, 1/1/22	$620,400	$240,000
Net income	419,300	363,300
Dividends	-98,000	-12,000
Retained Earnings, 12/31/22	$941,700	$591,300
Cash and receivables	$850,000	$750,000
Inventory	125,000	265,000
Equity investment	1,524,700
Property, plant & equipment (Net)	1,042,000	1,337,860
Total Assets	$3,541,700	$2,352,860
Accounts payable	$55,000	$311,210
Accrued liabilities	450,000	370,650
Notes payable	1,250,000	665,300
Common stock	95,000	183,950
Additional paid-in capital	750,000	230,450
Retained Earnings, 12/31/22	941,700	591,300
Total Liabilities and Equities	$3,541,700	$2,352,860

Required:

a. Prepare the 2022 journal entries, required by the equity method, on Parent's pre-consolidation books.

b. Prepare the consolidation entries for 2022.

Answer 1

1.Prepare the 2022 journal entries, required by the equity method, on Parent's pre-consolidation books.

1	Pre Consolidation entries by equity method
		Debit	Credit
	Income (loss) from subsidiary A/C	$282,300
	Income in Subsidiary A/C		$282,300
	Amount in account Drawn	$9,324
	Invest on Equity Account		$9,324
	Explanation
	Calculating Balance Subsidiary
	Income (loss) from subsidiary A/C / Net income in Subsidiary
	$282300/$363300 = 0.77704376548 or 77.70%
	Calculating Dividend got from by head = Dividends form subsidiary / Balance Subsidiary
	$12000 * 77.70%
	$9,324
2	Consolidation entries for 2022.
		Debit	Credit
	Gain and Loss Account Dr	$45,000
	To Inventory Account		$45,000
	Account Payment for Subsidiary Account DR	$35,000
	To Account Receivable A/C		$35,000

Note :Consolidation entries for 2022 Data follow below

In 2022, inter-company sales amounted to $98,000 with $45,000 of deferred profit remaining in ending inventory. Year-end inter-company receivables/payables amounted to $35,000.   

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